Deep in the Insurance Weeds at Berkshire Hathaway

The addition of three analysts to the roster of people firing questions at Warren Buffett at Berkshire Hathaway’s annual meeting has brought the company’s insurance operations to the fore this year.

Associated Press

Warren Buffett, chairman and CEO of Berkshire Hathaway sings with University of Nebraska cheerleaders prior to the annual shareholders meeting.

With more than an hour still to go, Mr. Buffett and his vice-chairman, Charlie Munger, have already fielded questions on natural disasters, potential insurance acquisitions, advances in car-insurance underwriting, mortality assumptions underlying life-reinsurance deals, and how Berkshire’s insurance units calculate reserves—among other insurance-related inquiries.

They’re the sort of questions that haven’t been asked very often at previous meetings, but shed further light on a part of Berkshire that has historically supplied more than half its earnings. Mr. Buffett has actually answered the questions that were asked—unlike other times where he uses an inquiry as a jumping off point for a discussion he’d prefer to have.

Shareholder Alex Rubalcava of Rubalcava Capital Management, attending his eighth annual meeting, praised the analysts for the quality of their questions, calling them “specific, directed and insightful.”

A question on natural disasters from Cliff Gallant of KBW gave Mr. Buffett a chance to crow about the amount of business Berkshire is now selling in New Zealand, Australia, Japan and Thailand following the catastrophes that have struck those countries in the past year and a half.

But he said it’s hard to determine if the increase in catastrophe claims over the past several years is tied to climate change. “Separating out the random from new trends is not easy to do,” Mr. Buffett says. Berkshire’s solution: “We tend to assume the worst.”

Buffett gave a firm “no” to a question from Gary Ransom of Dowling & Partners about whether Berksire’s Geico unit is experimenting with the use of on-board devices to measure driver behavior. Among large auto-insurers, that leaves Geico as an outlier. Progressive, Geico’s most direct competitor, leads the field in the use of so-called telematic devices and crows about the advantages it gives them in understanding drivers. Allstate, State Farm, Travelers and Hartford are also experimenting with telematics.

But Buffett said he’s not convinced that measuring driver behavior in real time offers an advantage.

”I do not see that as being a major change,” he said. “Our risk selection is working extremely well” already.

Mr. Buffett said he and Mr. Munger “have nothing against” commercial insurance and pointed out that they’ve expanded in the medical malpractice field. “If we could find a quality company in commercial lines… we would buy it in an instant,” he said.

Mr. Gallant asked about a reserve charge on a life reinsurance deal with Swiss Re that was disclosed (but not fully discussed) in the 2011 annual report, and about Berkshire’s reserving philosophies generally.

Buffett said Berkshire has been surprised by mortality figures on the policies underlying the Swiss Re arrangement, which has caused the company to set reserves to cover the costs if a “worst case” scenario were to come to pass over the life of the deal. Berkshire also may have the ability to re-price some of its life reinsurance transactions, though Buffett said the degree to which the Swiss Re will re-price “may be a subject of controversy.”

Buffett praised Tad Montross, the head of Berkshire’s General Re unit, saying he “feels good about the way he reserves.” But he also said that there’s “no coordination” about the assumptions underlying the underwriting or reserving at Berkshire’s various insurance operations.

Another analyst question prompted Buffett to discuss how he values Berkshire’s non-insurance operations. Rubalcava was excited by the answer, in which Buffett said he’d look to buy similar businesses for nine to 10 times earnings.

“He’s hinted at this number before, but this is the first time he’s been so explicit” Rubalcava said. “We wouldn’t have that without the analysts questions.”

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